[hattmall]

You are disadvantaged as an outsider because you don't know who is buying or selling and how much they are trading. You don't know the demand levels at various price points. If, for example, you want to buy Stock A which is currently trading for $5 and sell it for $6, but there is someone trying to sell 5 million shares for $5.05 but you can't see that you can't make an informed decision on ideal price points for your trade.

[Dylan16807]

> you want to buy Stock A which is currently trading for $5 and sell it for $6

It sounds like I'm asking for a pony in this scenario. I shouldn't expect to get that.

If I want to buy at $5 and hold it for more than a day, I don't think the secrecy of that big sale really affects me. It'll be over soon enough.

[nairboon]

> If I want to buy at $5 and hold it for more than a day, I don't think the secrecy of that big sale really affects me. It'll be over soon enough.

It does, it means that you could've gotten the stock for maybe $4.9 instead of $5.

[roenxi]

^_~ How? Nobody was selling it for $4.90 in that example.

[nairboon]

Although the above example was missing some details, I suspected it was meant to illustrate the following effect: The public last price was $5, so bid/ask will be around that price let's say 4.99/5.01, if you buy with a market order you'd pay approximately $5 ($5.01). But if there is a new large sell order for 5 million shares at 5.05, then the market would react to this information and adjust bids & asks. For illustrative purposes it could be possible (if the 5 million order is rather large in comparison), that the new bid/ask would be 4.89/4.91 and you'd get your shares for around $4.9.

[roenxi]

That is irrational. It suggests every time someone sees a market price at $5 they could put in an enormous fake sell order for shares at $5.05 to buy shares at $4.90 then cancel the fake order, which makes no sense. "The market" is giving away freebies in an insane way.

If the clearing price is $5 and someone puts in a huge sell order for $5.05 there is no reason for the clearing price to drop.

[hattmall]

>If the clearing price is $5 and someone puts in a huge sell order for $5.05 there is no reason for the clearing price to drop.

Except that the market is all game theory. If someone who bought a million shares with an ideal exit of $5.10 sees 5 million shares for sell at $5.05 it can absolutely inspire them to sell cheaper because the idea is predicting directional movements.

I design some financial software and the best way to think about it is to abstract away the idea of money and numbers. Think of it as a maze and every stock and price point combination is a doorway.

Normally a door, when you open it, you can see down the hallway to how long the next door is without actually entering the hallway. (In the stock market this is called Level II data) the impact of dark pools is that when you open a door you can't see how long it is. Except that it looks like every other hallway with a defined length, but you don't know that it is a hallway that keeps going for an undetermined amount of time. There's no way to figure out the length without entering the hallway and going as far as you can until you either reach the end or become exhausted (Not a great way to solve a maze).

Without access to the dark pool the best you can do is enter the hallway and figure out it doesn't behave as expected and move away from it.

It's a significant advantage when you are playing against other people to see the complete picture of the maze at any given time. There are entire teams of PhDs working to decode the positions of dark pools they don't have access to by analyzing option data.

[infecto]

Why would volume outside of the NBBO force price down? I think you are also over weighting order book impact to price. There is definitely some information there but with its not always that meaningful.

[sfn42]

Why would lots of shares available at 5.05 cause others to sell shares for 4.90?

[hattmall]

Because you want to move ahead of the 5.05 seller and be sure your shares can sell for $4.90. If the $5.05 seller is trying to sell 5 million, but it's taking a long time. They might drop down to $4.85 or something. It's all game theory and predicting what others will do. A big part of that is having all of the information.

[infecto]

You are not disadvantaged because you are not buying 5mm shares. I like to think of it closer to volume pricing rather secret pricing. You could definitely do retail level volume on a pool but you will be paying for it and that cost will generally be higher than any "savings" you may get in price.

Its similar to complaining that someone is buying eggs at wholesales prices while you are paying retail.